Zone Kingdom
Alexey Shapovalov
 Russia is actively forming special economic zones (SEZ). The government believes it essential for building a new economy.
Many experts consider this project risky. Yet, Russia seems to have no alternative. This is the way followed by most countries that achieved high-tech economic breakthrough. Russia needs to work out strict rules for SEZ and ensure their rapid development soon.
First Steps to the Zones
Less than a year has passed since Vladimir Putin signed the federal law "About special economic zones in the Russian Federation" in July 2005. The officials had time to choose 6 sites where 2 industrial zones and 4 technical/innovation zones are to be built. They also had time to distribute 8 billion rubles from the federal budget that is to be spent on SEZ development. They even had time to devise how to finance construction works inside the zones leaving out the Federal Treasury of Russia. Special Economic Zones state-owned company, created in April 2006, will manage the budget money. Yuri Zhdanov, head of the Federal Agency for SEZ Management, hopes from 40 to 50% of SEZ infrastructure will be built before the end of 2007. Moreover, 2 more types of SEZ will appear before late 2006-that is port zones and tourism/recreation zones, according to Zhdanov. Alongside the first tourism/recreation SEZ tender, an additional industrial SEZ tender will be held in June. Yet, the outcome of the second industrial zone tender is already predetermined. "President Putin asked to pay special attention to the applications of West Siberia and the Far East. So they shall be our principal concern," admitted Zhdanov. Thus, at least 2 more industrial SEZ are to appear by the end of 2006.
It is not only the federal officials who are interested in creating SEZ soon. The 6 regions who won the first SEZ tender have already begun infrastructure building using local budgets’ money. Besides, local authorities themselves offered to exempt future SEZ residents from local taxes not just during the first 5 years (as predetermined by the federal law), but for 10 years actually.
So, Russia is boosting the SEZ formation. The government has great expectations of SEZ. Russia’s Deputy Prime Minister Alexander Zhukov spoke at the First International Forum "SEZ in the Russian Federation. Investment fund of Russia." on May 16. He repeated that "SEZ are a means of implementing the central objective of Russia’s economic policy-to develop high-tech sectors of economy." According to the estimations of the Ministry for Economic Development and Trade, Russia shall gain 50 billion rubles of investments and some 20,000 new jobs after 20 years of existence of SEZ just in Elabuga and in Lipetsk region. Moreover, the Ministry expects technical/innovation zones to bring over 180 milliard rubles into the budget, and 52,000 additional jobs. Yuri Zhdanov said the projects of first SEZ residents shall start to pay off in 2 or 3 years. The government will not lose much either. In 2006 and 2007, federal and regional budgets are to spend around 46 billion rubles on SEZ, including port zones and tourism/recreation zones.
However, neither the government nor experts can guarantee the success of SEZ project in Russia.
Economy within Economy
Experts warn that the successful creation of SEZ in Russia directly depends on creating an almost perfect economic system in the zones. There should be strict rules for SEZ, minimized red tape, and a highly competitive environment, which would improve the investment climate in the zones. "SEZ played a major role in the development of China’s economy. They were especially important when investors were uncertain about China," said Duncan Innes-Ker, expert of the Economist Intelligence Unit. "Companies felt their investments were most secure in SEZ."
Russian Ministry for Economic Development and Trade has been trying to estimate the difference in expenditures of SEZ residents and companies outside of SEZs. Preliminary estimates state that residents’ expenditures will be 30% less than those of other companies, and that such difference is mainly due to the government’s investments in SEZ that make up some 10%. Tax concessions, however, make up only 5% out of the total 30% expenditure reduction for SEZ residents.
Tax concessions are especially important for high-tech companies-the residents of technical/innovation zones. Their main resource and cost item is HR. "Our employees’ income shall increase by nearly 20% without extra expenditures on our side," said Neil Vereshchagin, financial director of Luxoft IT-company.
Federal Agency for SEZ Management officials promise to liberate SEZ residents of red tape, and to work as a one-stop shop. Regional branches of the Federal Agency shall solve practically all problems. Besides, each SEZ will have a Supervisory Board, consisting of representatives of trade chambers, local authorities, and the SEZ residents. Zhdanov said residents will be able to call hotline to complain of the Agency’s officials.
Yet, it turned out Russian state officials intend to protect SEZ residents from external economy, and vice versa. According to Minister of Economic Development German Gref, an advisory council for industrial zones have been created. It will prevent SEZ residents from "disrupting the competitive environment of the economy." Industrial SEZ shall be producing goods the analogs of which are already being made in Russia. That is why experts believe that export should become the priority for such SEZ.
Old Stories in New Economy
Russia’s legal system which allows to form SEZ in the country is not so important now to most investors, while the details of SEZ project implementation are the key factors. New economy of Russia is being built upon the old one, and it is not only the officials and Russian companies, but also foreign future SEZ participants, who are trying to go by the old rules.
Finnish company Technopolis, specializing in building and maintenance of technoparks, is a typical example. Technopolis president Pertti Huuskonen and St. Petersburg governor Valentina Matvienko signed a memorandum in October 2005. It obliges Technopolis to build a 200,000 square meters technopark worth $200 million in the industrial SEZ in St. Petersburg. Yet, the Federal Agency for SEZ Management regarded Technopolis’s demands as too high. Yuri Zhdanov told Kommersant that Technopolis pushes for extra 10 hectares of land, beside the 200,000 square meters where it planned to build a technopark. Technopolis also sets a requirement: it will attract Finnish investors only on the condition that it is Technopolis who builds the technopark.
The main stumbling block is the rent rate demanded by Technopolis. Zhdanov said they demand $37 per square meter which is comparable to the market rent rate in St. Petersburg. The Federal Agency cannot meet such requirements, and offers Technopolis to reduce the rent rate by half. "We do not refuse to negociate," said Zhdanov, "but we have tens of construction offers, and from Finnish and Swedish companies too." Technopolis turned out to be so insistent that they even wrote a letter to Russian Prime Minister Mikhail Fradkov [of which Kommersant has a copy]. The letter describes in detail Technopolis’s competitive advantages in the SEZ project.
However, the problem of document and project coordination in various agencies of Russia, necessary for SEZ residents, has another aspect. To large foreign investors, time might be more important than SEZ preferences. Kommersant found out that Korean company Hyundai, that intended to become industrial SEZ resident in Tatarstan, decided not to wait for the SEZ opening there. The company’s management thought it more important to enter Russia’s market as soon as possible. So they decided to initiate building their factory now, not far from Elabuga SEZ in Tatarstan.
The SEZ project should be rapidly implemented due to the investment boom in Russia. Unlike Hyundai, who refused the SEZ advantages in favor of a greenfield project, many investors will prefer other countries’ SEZ should there be problems with SEZ in Russia.
Kommersant
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